Barron’s-Dividend Stocks article

Barron’s-Dividend Stocks article

This week’s Barron’s showed utilities some love, with two of them, Sempra (SRE) and NextEra Energy (NEE), discussed in the cover article on dividend paying stocks that could be used for some defensive positioning. (See article here.) The article says that if the Fed is not going to raise rates it could be a really good time for dividend stocks. Sempra was actually the highest yielding stock of the seven listed in the article, yielding 3.1%. NEE was the third highest yielding, at 2.6%.

The article did put out an important warning about investing in utilities today, stating that on a historical basis utility valuations are elevated, with utilities in the S&P500 trading at 18.4x earnings, versus the five-year average of 17x. I would say the article’s statement really undersells the situation when you look at an even longer time horizon. Here is a chart of the P/E ratio of the Philadelphia Utility Index (UTY) since 2002.

Source: May 2019 Utility Stats Monthly.

You can see there have been long stretches of time where the index has been below 13x, which makes the 17x average referred to in the article appear kind of frothy.

Looking at the historic dividend yield of the UTY gives a similar feel: while valuations look a little rich on a five year basis, they look even more rich when going back over a longer time horizon.

Source: May 2019 Utility Stats Monthly.

Not only are sector valuations at historical highs, but the article picked two stocks that are among the more expensive of the group.

Source: May 2019 Utility Stats Monthly.

You can see NEE and SRE toward the upper left-hand corner of the chart. So be careful with these utilities. If it turns out that this is a good time to get defensive, they will do fine, but there are a lot of other scenarios where investing in these richly valued stocks will give a disappointing return.

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